Barron's: Is a Bigger Drop Coming for the Stock Market? Here's a Red Flag
Article by Jacob Sonenshine in Barron's
To say that the Omicron variant is shaking the market would be an understatement. But add that stocks are more expensive than they’ve ever been—and a true correction now wouldn’t surprise anybody.
The S&P 500 has fallen almost 3% from its all-time high hit in late November, just before scientists in South Africa reported the new Covid-19 strain. On Friday, the market had its worst day of the year. Tuesday was more ugliness—producers of vaccines and treatments predicted their remedies probably wouldn’t be as effective against Omicron as other variants.
But that true correction—a 10% drop—has been elusive, even during all these months of the pandemic. And that itself is a bit astonishing, since corrections are often a normal part of a larger bull market.
One indicator, though, forecasts a correction—like a dark cloud usually brings rain. The total U.S. equity market capitalization is about 215% of U.S. gross domestic product—the highest level ever, according to Global Financial Data.
Such a high number isn’t good. It’s bad, often a sign that a correction is just around the corner.
In 1929, market cap to GDP hit an all-time high of about 100%, just before the famous stock market crash late that year. In 2000, another high at about 150%, just before a bear market—a drop of at least 20%—began. In 2008, a multiyear high, just ahead of the financial crisis.
To be sure, stock valuations .......
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